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Is Building An Industrial Strength Investment Part of Your Portfolio?

By: InvestorsObserver
Posted: 10/28/2013 12:32:00 AM
Referenced Stocks: GWW;MCD;WMT

Is Building An Industrial Strength Investment Part of Your Portfolio?

Kevin Kersten 10/28/2013

Grainger ( GWW ) may not exactly be a common household name like Walmart ( WMT ) or McDonalds ( MCD ) but chances you would suddenly notice if their products were missing. Grainger is an industrial supply company "For the Ones Who Get it Done." Grainger sells grinding wheels, electrical equipment, janitorial supplies, tools, welding equipment, machine parts, fasteners and so much more. If you work in industry, making things with your hands, building stuff or fixing things you may well be using some Granger parts as they have 6% of the entire market.

The company has 700+ branches including over 350+ US based stores. Revenues from the US make up over 77% of sales, but the company sells in Canada, Mexico, Japan, China, India, Europe and other places providing various needs to a wide range of industries. Within the US markets, sales were spread relatively evenly between heavy manufacturing, commercial and government segments each representing about a fifth of the company's revenue. Light manufacturing, retail, reseller and natural resource segments made up the balance.  The company is obviously getting some parts where they need to go as sales are expected to grow 6% in 2013.  Almost a third of sales are ordered online at the company which has about 950,000 products available.

Grainger stock has done well over the last three years rising from near $100 a share to $264 a share. Over the last 7 years, the company has bought back 18% of the company through share buybacks.  The entire company is valued at $18.3 billion pulling in 2012 sales of $8.9 billion and earnings of $9.52 a share. The stock has a dividend yield of 1.41%. Gross margins are 44% and the company has a pretax return on invested capital of nearly 46% which is impressive. Standard and Poor's rates the stock a four STARS buy.

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Grainger is obviously connecting men to the parts they need to keep everything running, but the company did not meet expectations this past quarter. Were expectations too high or did the company underperform? In the Third Quarter EPS rose 5% to 2.95 below the $3.03 expected. Sales rose 5% to 2.39 less than the 2.41 expected. Weaker than expected sales were blamed on the soft global economy. Sales growth is expected to fall from 5-8% down to the 5-6% annual rate for the next several years. The company is expecting negative foreign exchange rates to hurt the bottom line too. Margins are expected to rise about 0.8%. Ultimately, the company is still making money, but macro economic conditions are stopping it from growing as fast as they thought it would before. The company is generating operating cash flow of $900 million plus and still continuing share buybacks so things look good.

Wall Street is always excited to hear good numbers, but in this case they may have just got a little too excited. In the Grainger world where real men work with power tools, sales are good and growing. They just are not growing at the pace some once thought they would. Investors seem to have realized that and that is why the stock did not fall, despite missing earnings.

Grainger still looks like a long-term buy. With the slowing sales you might even consider a covered call on the stock. With the stock at 264.17 the 270 call for January 2014 has a 6.30 bid. One can buy the stock and sell the call for a net debit of 257.87. This covered call has a 4.7% assigned return rate if it rises to the 270 level by expiration. For comparison purposes only- that 4.7% over 86 days is a 20% annualized rate. In order to be assigned the stock needs to rise 2.2%, which is not much if you consider the stock has averaged about 3% monthly over the last three years.   This trade has 2.4% of downside protection.

Those who get it done, frequently use Grainger parts. The company's growth has been good, but moderating a little. When a company has been growing sales and gaining market share the company is doing something right. Maybe Grainger should have a part in your portfolio.